Make or Buy (Outsourcing) Example #2 Troy Engines, Inc. manufactures a variety of engines for use in heavy equipment. The company has always produced all of the engine components in house, including the carburetors. An outside supplier has offered to sell the carburetors to Troy for a cost of $35 per unit. Use the following information to evaluate whether or not Troy should accept the offer. Direct Materials Direct Labor Variable MOH Fixed MOH, Traceable* Fixed MOH, Allocated Total Cost Per Unit $14 10 3 6 9 $42 15,000 Units $210,000 150,000 45,000 90,000 135,000 $630,000 *One-third supervisory salary; two-thirds depreciation of special equipment (no resale value). 1. Based on the information presented, should Troy Engines accept the offer from the outside supplier? 2. Assume that if Troy Engines purchased the carburetors from the outside supplier, the freed capacity could be used to launch a new product line. The segment margin of the new product would be $150,000 per year. Should Troy Engines accept the offer from the outside supplier if the new product could be produced?

Make or Buy (Outsourcing) Example #2 Troy Engines, Inc. manufactures a variety of engines for use in heavy equipment. The company has always produced all of the engine components in house, including the carburetors. An outside supplier has offered to sell the carburetors to Troy for a cost of $35 per unit. Use the following information to evaluate whether or not Troy should accept the offer. Direct Materials Direct Labor Variable MOH Fixed MOH, Traceable* Fixed MOH, Allocated Total Cost Per Unit $14 10 3 6 9 $42 15,000 Units $210,000 150,000 45,000 90,000 135,000 $630,000 *One-third supervisory salary; two-thirds depreciation of special equipment (no resale value). 1. Based on the information presented, should Troy Engines accept the offer from the outside supplier? 2. Assume that if Troy Engines purchased the carburetors from the outside supplier, the freed capacity could be used to launch a new product line. The segment margin of the new product would be $150,000 per year. Should Troy Engines accept the offer from the outside supplier if the new product could be produced?

Cornerstones of Cost Management (Cornerstones Series)

4th Edition

ISBN:9781305970663

Author:Don R. Hansen, Maryanne M. Mowen

Publisher:Don R. Hansen, Maryanne M. Mowen

Chapter11: Strategic Cost Management

Section: Chapter Questions

Problem 33P: Southward Company has implemented a JIT flexible manufacturing system. John Richins, controller of...

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What should be done? Problem 2 (Make or Buy a Component) Diamond Inc., manufactures a variety of heating and air-conditioning units. The company is currently manufacturing all of its own component parts. An outside supplier has offered to sell a thermostat to Diamond for P200 per unit. To evaluate this offer, Diamond lInc., has gathered the following information relating to its own cost of producing the thermostat internally. Direct materials Direct labor Variable manufacturing overhead Fixed manufacturing overhead, traceable Fixed manufacturing overhead, common, but allocated Total cost 40% supervisory salaries; 60% depreciation of special equipment (no resale value) Per unit P 60 80 10 50 15,000 units per year P. 900,000 1,200,000 150,000 750,000 1.500.000 P 4, 500,000 100 P 300 Required: 1. Assuming that the company has no alternative use for the facilities now being used to produce the thermostat, should the outside supplier's offer be accepted? Show all computations. 2. Suppose…
Troy Engines, Limited, manufactures a variety of engines for use in heavy equipment. The company has always produced all of the parts for its engines, including the carburetors. An outside supplier offered to sell one type of carburetor to Troy Engines, Limited, for a cost of $40 per unit. To evaluate this offer, Troy Engines, Limited, summarized the cost of producing the carburetor internally as follows: Direct materials Direct labor Variable manufacturing overhead Fixed manufacturing overhead, traceable Fixed manufacturing overhead, allocated Total cost Per Unit 15,000 Units Per Year $ 15 11 2 9* 12 $ 225,000 165,000 30,000 135,000 180,000 $ 49 $ 735,000 *One-third supervisory salaries; two-thirds depreciation of special equipment (no resale value). Required: 1. If the company has no alternative use for the facilities being used to produce the carburetors, what would be the financial advantage (disadvantage) of buying 15,000 carburetors from the outside supplier? 2. Should the…
Troy Engines, Limited, manufactures a variety of engines for use in heavy equipment. The company has always produced all of the parts for its engines, including the carburetors. An outside supplier offered to sell one type of carburetor to Troy Engines, Limited, for a cost of $30 per unit. To evaluate this offer, Troy Engines, Limited, summarized the cost of producing the carburetor internally as follows: Direct materials Direct labor Variable manufacturing overhead Fixed manufacturing overhead, traceable Fixed manufacturing overhead, allocated Total cost Per 19,000 Units Unit Per Year $ 12 $ 228,000 10 3 190,000 57,000 3* 6 57,000 114,000 $ 34 $ 646,000 "One-third supervisory salaries; two-thirds depreciation of special equipment (no resale value). Required: 1. If the company has no alternative use for the facilities being used to produce the carburetors, what would be the financial advantage (disadvantage) of buying 19,000 carburetors from the outside supplier? 2. Should the outside…
Troy Engines, Limited, manufactures a variety of engines for use in heavy equipment. The company has always produced all of the parts for its engines, including the carburetors. An outside supplier offered to sell one type of carburetor to Troy Engines, Limited, for a cost of $30 per unit. To evaluate this offer, Troy Engines, Limited, summarized the cost of producing the carburetor internally as follows: Direct materials Direct labor Variable manufacturing overhead Fixed manufacturing overhead, traceable Fixed manufacturing overhead, allocated Total cost Per Unit $ 12 8 2 9* Required 1 Required 2 Required 3 Required 4 12 $43 *One-third supervisory salaries; two-thirds depreciation of special equipment (no resale value). Required: 1. If the company has no alternative use for the facilities being used to produce the carburetors, what would be the financial advantage (disadvantage) of buying 12,000 carburetors from the outside supplier? 2. Should the outside supplier's offer be accepted?…
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o Company has traditionally manufactured a number of different standard machine parts. It is now exploring an outsourcing decision r several of the parts that it currently produces. Cost information for one such machine part is given below: Variable cost/unit Fixed manufacturing costs (total) Allocated corporate overhead Unit product cost (based on 500 units) $ 31.50 5,440.00 6,760.00 $ 55.90 fty percent of the fixed manufacturing costs are directly traceable to this specific machine part and therefore avoidable. An outside upplier will sell the part at a price of $44 per unit if 500 units are purchased. equired: repare an analysis whether We Make should continue to manufacture this machine part or whether it should purchase it from the utside supplier. (Negative amounts should be indicated by a minus sign. Round "Per Unit" to 2 decimal places.) Purchase ariable cost ixed manufacturing overhead Common costs otal costs hould the company make or buy? O Make ○ Buy 500 Units Per Unit Make…